Overview
Harvard Business School defines strategic planning as “the ongoing organizational process of using available knowledge to document a business’s intended direction.”[1] An important part of this process is financially modeling strategic initiatives and the resulting business operations flowing out of the plan. Creating a financial model helps to contextualize the costs and returns of investment and create financial goals to track. Following the strategic planning process, the business can true up annual operations and goals to keep the business on course for reaching financial goals.
Without a strategic plan, there is danger of landing in various pitfalls:
Deferring investment spending
Creep in the size of investments
Missed opportunities for growth
Missed targets for execution and results
Financial stagnation or decline
Loss of key leaders who are not financially supported
Creating a Financial Model for the Strategic Plan
A written-down strategic plan that is reviewed on a monthly or quarterly basis and includes specific targets will focus your energy on systematically growing your company during the next several years. It is key that all relative parties are engaging in these discussions to ensure that there is progress being made on implementing your strategy. The following are components in a strategic planning financial model:
Key assumptions which match the written strategy
Income statement
Balance sheet
Cash flow
Other KPIs which are included in the plan
The financial model should follow the same format as your company’s chart of accounts. Each year’s budget cycle should include and/or reference the corresponding year in the strategic plan model. Following is a sample of a financial model:
For the financial model, determine the steps needed to reach the goals in each of the next three to five years. Determine the role/department responsible for each step. Where possible, assign a specific quarter of the year, or other timeline, for each step. If you created a strategic plan or 3 to 5-year plan last year, update it with this year’s progress and compare goals vs. actual achievements. Determine a regular meeting schedule to stay on top of tracking your progress with each role/department involved in the strategic plan.
Summary
Strategic planning outlines where you see your business going and the plan you have put in place to get there. A financial model can be used to support you in implementing this plan, and it entails creating assumptions, utilizing the business’s financial statements, and identifying the KPIs worth tracking.
Make it a monthly or quarterly practice to review the strategic plan, and an annual practice to update the financial model, to ensure that your company is on track to meet the goals you have set and to keep a future-focused vision.
[1] Harvard Business School, Why is Strategic Planning Important?
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